Few investors have the prescience of this week’s Financial Thought Leader guest. Long before the 2008/2009 financial crisis he identified the powerful and destructive rise of what he called the “Shadow Banking System”, the unregulated institutions funding the housing and credit bubble. He also coined the phrase “Minsky Moment”, after the economist Hyman Minsky’s theory that financial stability ultimately leads to financial instability, as people and institutions take on more risk. That is exactly what happened. This week’s WEALTHTRACK guest is legendary bond trader, Federal Reserve watcher and economist, Paul McCulley who spent many years in the top ranks of bond giant PIMCO. What financial forces does he see gathering now?
Paul McCulley Economist & Fed Expert
CONSUELO MACK: This week on WEALTHTRACK, globe trotting economist, Fed watcher and Great Investor Paul McCulley gives us the big picture view of the world’s economies and markets and what it means for your portfolio, next on Consuelo Mack WEALTHTRACK.
Hello and welcome to this edition of WEALTHTRACK, I’m Consuelo Mack.
Few investors have the prescience of this week’s Financial Thought Leader guest, which is why we have asked him to come back to WEALTHTRACK and give us an update on his views of the state of the financial world and markets. We will also ask him to make a few portfolio suggestions!
He is Paul McCulley, former Senior Partner at PIMCO. Founding Member of its Investment Policy Committee along with firm founder Bill Gross, Author of the influential monthly “Global Central Bank Focus”, and Manager of PIMCO’s huge short term trading desk where he oversaw an estimated $400 billion dollars in assets.
McCulley retired from PIMCO in 2010 to write, think, speak and otherwise lead a more balanced life, which he did until last year, when he was lured back to PIMCO for a few months as Chief Economist by his former boss and close friend, Bill Gross before Gross abruptly left the firm for another. We’ll discuss McCulley’s decisions in our extra session on our website WEALTHTRACK.com.
I mentioned McCulley’s prescience. Long before the 2008/2009 financial crisis he identified the powerful and destructive rise of what he called the “Shadow Banking System”, the unregulated institutions feeding the housing and credit bubble. And he coined the phrase “Minsky Moment”, after economist Hyman Minsky’s theory that financial stability, as this country had during the Alan Greenspan era, ultimately leads to financial instability as people and institutions take on more and more risk. Well of course, that is exactly what happened.
We asked McCulley what forces he sees building in the economy now?
It’s a fascinating question, because the whole mosaic of Minsky I can talk about for hours, and we don’t have hours. The “Minsky Moment” is the culmination of excesses where you have a sudden stop in the markets, and you have a massive recession. And technically speaking, what you’re doing is you’re ushering in something called a ‘liquidity trap.’ Which is that your central bank takes interest rates to zero, but nothing much happens. Because the private sector is checked into the Nurse Ratchet center for balance sheet rehabilitation. So it’s not the price of debt; the private sector has got too much of it. So they’re delevering. So the central bank, quite appropriately, goes to zero, but nothing much happens because you’ve got delevering. And that is known technically as a ‘liquidity trap.’
CONSUELO MACK: And so where are we in the liquidity trap? Then are we out of it?
PAUL MCCULLEY: Well, fortunately America is on the cusp of exiting.